China’s Fake Carbon Tax

Beijing was widely blamed for derailing the 2009 Copenhagen summit and its chances of producing an agreement on climate change. But suddenly last week, state media announced that the Ministry of Finance could soon approve a carbon tax on China’s biggest energy consumers before the end of the current Five-Year Plan (2011-2015).

Environmentalists will argue that plans for a carbon tax by the largest emitter of greenhouse gases are a sign of Beijing’s genuine commitment to do its part—and they will now urge other governments to follow suit. But don’t be fooled. Beijing’s proposal is little more than clever political theater mixed with passing the economic buck.

For some, the timing will appear odd. Why announce the intention for a carbon tax now when cracks are widening in the Chinese economy? The truth is the Chinese government hasn’t been pleased with all the negative international attention it has garnered ever since Copenhagen. The new proposed environmental taxation system should really then be seen as a preemptive strike against international pressure, not a commitment against climate change.

The carbon tax is of a piece with the fact that the current Five-Year Plan is the first to explicitly commit to market mechanisms to reduce the country’s carbon emissions as part of the plan’s “green, low carbon development concept.”

While China insists it takes climate change seriously, it’s equally adamant that solutions must not jeopardize economic growth. As its standoff with the European Union over the latter’s tax on airline emissions shows, China doesn’t like placing onerous costs on its firms in the name of fighting climate change. But since it’s being forced to consider some solution, it wants to do it on its own terms.

Beijing will do all it can to soften its own proposal. That explains why the Ministry of Finance has already noted that economic growth will take priority over the date of implementation of the carbon tax. More importantly, the choice of carbon tax over a cap-and-trade scheme exposes the government’s intent. The latter would have meant a strict limit on the total amount of carbon emitted. The former just increases the price of carbon, but sets no administrative cap.

Still, any proposed carbon tax will impose some economic costs. So why publicly commit to one?

One reason is that Beijing leaves itself some wiggle room in international negotiations. A carbon tax will give Beijing the political cover to emit even more. For every coal-fired power station closed down over the past five years, two have sprung up in its place. Coal consumption has been increasing by around 17% each year. The International Energy Agency estimates almost 80% of China’s energy needs will be met by coal and oil in 2030. Every time someone points to these statistics to pressure Beijing to sign a more stringent international agreement, Chinese officials can take the higher moral ground.

The announcement is also a subtle attempt at environmental buck passing. Although details have not yet emerged, it is clear that the tax will only apply to the largest emitters in the country. That surely means export manufacturing, which is responsible for anywhere between 20% and 50% all Chinese carbon emissions. This, in turn, places the burden on as many people outside China as possible.

First, many of those firms slugged by the carbon tax will be foreign-owned giants. Foreign investors dominate China’s export industry. Second, Beijing knows that any additional costs from a carbon tax placed on exporters would be passed on to the end consumer in those markets. Beijing has consistently argued that the end-consumer country, and not the producer country, should bear the burden of paying for carbon emissions. The unwillingness—understandable, no doubt—to accept responsibility for the emissions released in producing goods for foreign markets has been a constant bugbear in discussions between China and the West. If China gets its way, it will edge closer to winning the day without having to win the argument.

Third, in the meantime, Beijing has many tools at its disposal to ease the pain on its own wards. It’s true a carbon tax would impose some financial difficulty for China’s large state-owned enterprises in industries such as power generation and construction. But fat on state protection, other tax and subsidy assistance and cheap credit, the government will ensure that these companies can easily bear the burden. The proposed rate of 10 yuan per ton of carbon is too small to be significant, and promises that this will rise over time aren’t reliable.

Whatever one may think about global climate-change agreements, it’s important to understand the two-faced game China is playing. The Middle Kingdom’s rise has caused anxiety in many quarters abroad, and Beijing is keen to assuage these worries. It wants to project the image of a responsible global citizen. But it has little intention of acting responsibly.